Settlements in Cash: Current and Future Possibilities

Author: Vilius Martišius, Associated Partner, Attorney-at-Law and Court mediator at METIDA

Euro_coins_and_banknotesCurrently, settlements in cash are not restricted in Lithuania. Yet, in 2015 this situation is likely to change radically. This paper will discuss the predicted changes and its causes.

The Civil Code of the Republic of Lithuania (CC), the Law on Payments and other legal acts allow two ways to process payments: in cash or in non-cash. Under the CC, the non-cash settlements can be effected using payment orders, letters of credit, checks, bills of exchange, collection and other means of settlement established by laws.

The current edition of the CC allows natural persons who are not engaged in economic-commercial activities to settle up either in a non-cash form or in cash with no limitation of the amount. As for legal persons, as well as the natural persons involved in economic-commercial activities, the settlements are effected in non-cash form (except in cases and procedure prescribed by laws, where settlements can be processed in cash). Yet, this norm is not strictly defined, therefore, even the legal persons are not prohibited to make settlements in cash. In fact, the case law has shown that the settlements with participation of the natural persons not involved in economic-commercial activities can be effected in cash with no limitation and even without the written proof. Parties are allowed to choose any payment type they like, hence, paying in cash instead of making a bank transaction does not deny the fact that the money has been paid. However, there are certain restrictions too, but they should be considered as an exception to the rule rather than the rule itself. For example, the Law on Tax Administration of the Republic of Lithuania allows a tax administrator to temporarily restrict tax payer’s possibilities to settle up in cash (up to 1 year) if a tax administrator identifies any irregularities of the accounting rules or other violations related to the financial operations and impose administrative penalties. According to the State Tax Inspectorate of Lithuania (STI), in 2013 this restriction was applied only to about 75 companies in Lithuania.

The monitoring of the settlements in cash also encompasses a requirement to provide information. Yet, this requirement should be regarded as an obligation rather than the restriction. This obligation assigned to the natural persons is listed in the Law on Tax Administration. This law requires a permanent resident of Lithuania to provide the STI with all the relevant information on his/her transaction if it meets certain conditions specified in the following sentences. Firstly, the resident receives money from the natural or foreign persons as a result of his/her transaction (including the borrowed sums). In addition, the sum that another person pays the resident in cash for a single transaction or for several transactions carried out with the same person per one calendar year is over 50,000 litas. Thirdly, the transaction is not of the notarial form and a resident does not receive any income from the transactions, and that income is included into the self assessment form and submitted to the tax administrator under the other regulations of the law on tax. Thus, this obligation is imposed only in exceptional cases, i.e. big transactions and when the income is not included into the self-assessment form in a normal way.

This topic should also be analysed in light of the Law on the Prevention of Money Laundering and Terrorist Financing which requires financial institutions that handle monetary transactions to submit data confirming customer’s identity and information about the monetary transactions to the Financial Crime Investigation Service if the sum of the single monetary transaction in cash or the sum of the several transactions in cash, related to each other, is over 15,000 euros or in the equivalent sum in another currency. Certain duties are also imposed to notaries, county court bailiffs and persons who are engaged in economic-commercial activities that include trade of the immovable property, gemstones, precious metals, movable cultural property, antiques and other property whose value is over 15,000 euros or the equivalent sum in another currency. Yet, the aim of this specific requirement is to prevent major crime and it should not be considered as a restriction of the settlements in cash.

However, the situation will be different from 1 January 2015 and we are likely to experience more changes related to the legal regulations in this field.

On 18 September 2014 Lithuanian Parliament approved the amendments of the CC, according to which, the loan agreement is required to be of the notarial form if the sum of the loan exceeds 3000 euros and the transaction is made in cash. Provisions on joint stock companies, promissory notes and bills of exchange are also undergoing amendments. According to these new amendments, the notary approval will be required if the transactions include the transfer of the 25% shares of the joint stock companies or when the value of the shares exceeds 14,500 euros. This rule will not be applied if the shares are sold when the documentation is taken care by the security account manager under the laws on public offering of securities, e.g. selling shares via stock exchange. Also, the amendments state that the promissory notes must be of the notarial form if its sum exceeds 3000 euros and if its issuer is a natural person.

But the major achievements related to the restriction of the settlements in cash are only expected in the future. On 21 November 2013 the Ministry of Finance submitted the proposal on the amendments of the CC’s 6.929 article to the government. Under this proposal, the settlements and other payments resulted from the transaction and (or) transactions between persons related to it can be carried out in cash if they do not exceed 10,000 litas or the equivalent sum in another currency. The overall sum of the instalments in cash, as well as any other payments in cash resulted from the transaction and (or) transactions between persons related to it cannot exceed 10,000 litas or the equivalent sum in another currency. This restriction is not applicable for the settlements in cash operated via banks or other payment service providers, or when the money is exchanged in another currency in a currency exchange company or deposited into a cash machine. Furthermore, this restriction does not come into effect when the non-cash settlements between the persons is not possible due to the objective reasons. Yet, the subject in this case is required to inform the competent state institutions authorized by the government.

These amendments under the aforementioned proposals were expected to come into force on 1 July 2014. Yet, the Parliament did not agree with this project and sent it back to the Ministry for the correction. The new tailored amendments including the restrictions of the settlements in cash has lowered the benchmark and now allows cash settlements for natural and legal persons if the sum does not exceed 15,000 euros (51,800 litas). As for the companies or persons engaged in commercial activities, the cash settlements are allowed if the sum does not exceed 5,000 euros (17,300 litas).

The proposals on these amendments were submitted for the examination to the interested institutions on 23 September 2014. According to the Ministry’s of Economy assessment submitted on 6 October, in certain scope these amendments overlap with the aforementioned amendments coming into effect on 1 January 2015, leading to the situations where different in nature requirements overlapping to each other in terms of aims are applied to the same transaction.

Taking this into account, the Ministry of the Economy suggested that the edition of the amendments of 18 September were written in more detail, i.e. they should include another reservation which would require sale and purchase agreements of the joint stock companies to be of the notarial form unless the settlement is effected in the non-cash form. The Ministry of Finance expects that their proposed amendments will come into force on 1 July 2015. However, taking into account other competent institutions and the intensive Parliament’s examination of these amendments in spring, the Parliament might not easily approve this proposal.

The initiators of the proposed amendments claim that these changes are necessary when seeking to reduce the number of transactions carried out during the fraud activities including the unjust enrichment. This would minimise crime and infringements related to these activities. Meanwhile, under the European Central Bank’s opinion of 17 January 2014 on the first Ministry’s of Finance proposed amendments of legal acts related to the restrictions on the cash settlements, the 19th preamble of the Council Regulation of 3 May 1998 on the introduction of the euro stated that “whereas limitations on payments in notes and coins, established by Member States for public reasons, are not incompatible with the status of legal tender of euro bank- notes and coins, provided that other lawful means for the settlement of monetary debts are available“. The Central Bank considers the aims of the proposed amendments on the legal acts to be public reasons, i.e. fighting tax avoidance and shadow economy, and thus, they justify the restrictions on the cash settlements.

Similar restrictions are found in other Member States, where on average the settlements in cash cannot exceed 3000 euros.

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